A popular rule in business is the “80/20 Rule” (the Pareto Principle). It means many different things to different businesses. For some it may mean “80% of your revenues come from 20% of your customers”, or maybe 80% of your customer service calls come from 20% of your customers, etc. The idea behind the rule is that a disproportionately small group can have an oversized influence on your business. The logic follows that if we can identify this group and maximize their revenues (or minimize their costs) we will turbocharge the profitability of the business.
Here I look at industry claim statistics to understand whether the 80/20 Rule applies to workers’ comp claims. Consider the following statistics (gathered and rounded from NCCI data):
- Percentage of all Claims that are Lost Time Claims: 24%
- Percentage of all Losses that are from Lost Time Claims: 93%
Right away we see that, if anything, workers comp claims follow a rule even more dramatic than the 80/20 rule – 93% of all losses come from 24% of all claims, and these claims are easy to identify (lost time claims).
Now I’ll check to see if workers’ comp lost time claims follow a similar rule
- Cost of Average Lost Time Claim: $55,000
- Cost of Median Lost Time Claim: $27,000 (50% of lost time claims larger than this)
- Percentage of losses excess of $27,000: 38%
Using some math and an understanding of the loss distribution curve, I calculate
- Percentage of losses from claims excess of $27,000: 87%
So, for lost time claims, 87% of all losses come from 50% of all claims. Not quite an 80/20 rule, but pretty close. Finally, I combine the information from the two rules derived above:
- Percentage of all Claims that are larger than $27,000: 24% x 50% = 12%
- Percentage of all Losses from claims larger than $27,000: 93% x 87% = 81%
Now we have the information to answer the question “Do workers’ comp claims follow the 80/20 rule?”
Absolutely they do! Actually the effect is even more dramatic. 81% of all losses come from only 12% of all claims. So, if someone at your company tells you that we’d have had a good year if it wasn’t for a small number of large lost time claims, you can comfort them by explaining that’s the Pareto principle at work.